Chapter 2: Life Insurance Basics

With this coverage, the key employee is the insured, and the business is all of the following:

-Applicant -Policyowner -Premium payer -Beneficiary

Beneficiary

A person who receives the benefits of an insurance policy

Business uses of life insurance

Businesses use life insurance for the same reason individuals use life insurance: it creates an immediate payment upon the death of the insured.

Bequests

leaving funds to the insured's church, school, or a charity

Insurance proceeds paid in a lump-sum may be needed for any of the following expenses:

-Costs association with death (postmortem) -Debt cancellation (as an alternative to estate liquidation) -Emergency reserve funds -Retirement fund -bequests

There are several types of buy-sell agreements that can be used for partnerships and corporation:

-Cross Purchase -Entity Purchase -Stock Purchase -Stock Redemption

______ _____ provides generic information on various types of policies. ______ _______ provides specific information on the policy being issued

Buyer's guide Policy summary

A person may create an estate through earnings, savings, and investments, but all of these methods require disciplined action and a significant period of time.

The purchase of life insurance creates and immediate estate.

Minor

a person under legal age

Estate

a person's net worth

Besides taking care of immediate expenses after the death of the insured, the family may need to plan for an income source long term, so the needs approach to life insurance will factor in the following concerns:

-Replacing insured's salary or lost services -Social security income "blackout" period -Liquidation vs. retention of capital

In what ways might individuals seeking to buy life insurance may they need assistance in?

-Trying to establish how much coverage is appropriate -Based on the availability to pay the premium -Serve their needs -Protect their survivors

permanent life insurance

A general term used to refer to various forms of whole life insurance policies that remain in effect to age 100, as long as the premium is paid. Permanent insurance provides lifetime protection, and includes a savings element (or cash value).

What is the most common use of life insurance by businesses?

An employee benefit - It serves as a protection for employees and their beneficiaries. There are also other forms of life insurance that can serve business owners and their survivors, and even protect the business itself. These include funding business continuation agreements, compensating executives, and protecting the business against financial loss resulting from the death or disability of key employees.

Entity purchase

used when the partnership buys the policies on the partners

Key Person Insurance

A business can suffer a financial loss because of the premature death of a key employee - someone who has specialized knowledge, skills or business contract. A business can lessen the risk of such loss by the use of key person insurance

Buy-Sell Agreement

A legal contract that determines what will be done with a business in the event that an owner dies or becomes disabled. This is also referred to as a business continuation agreement.

The process of issuing a life insurance policy begins with solicitation

In simplest terms, solicitation of insurance means an attempt to persuade a person to buy an insurance policy, and it can be done orally or in writing. This includes providing information about available products, describing the policy benefits, making recommendations about a specific type of policy, and trying to secure a contract between the applicant and the insurance company. Any sales presentations used by insurers or their agents in communication with public must be accurate and complete

why is insurable interest not required of beneficiaries?

Since the beneficiary's well-being is dependent upon the insured, and the beneficiary's life is not the one being insured, the beneficiary does not have to show an insurable interest for a policy to be purchased

Replacing Insured's Salary or Lost Services

The surviving spouse who was the caregiver of the children may have to train to enter the job market. If the spouse works outside of the home, a new expense for day care must be considered.

Classes of Life Insurance Policies

There are many types of life insurance products available for consumers. Although all life insurance products offer death protection, each type also includes its own unique features and benefits and is designed to serve different insureds' needs

Insurable Interest

To purchase insurance, the policyowner must face the possibility of losing money or something of value in the event of loss.

Liquidation vs. Retention of Capital

Under the retention of capital approach, enough insurance is purchased so that when added to other liquid assets, there is enough to pay income benefits without jeopardizing the insured's principal asset (such as a home).

Retirement fund

as a source of retirement income

Buyer's guide

Provides basic, generic information about life insurance policies that contains, and is limited to, language approved by the Department of Insurance. This document explains how a buyer should go about choosing the amount and type of insurance to buy, and how a buyer can save money by comparing the costs of similar policies. Insurers must provide a buyer's guide to all prospective policy applicants prior to accepting their initial premium. If the policy contains an unconditional refund provision of at least 10 day (free-look period), a buyer's guide can be delivered with the policy.

Insurance interest ____ exist at the time of ___________

must application

Group life insurance

written as a master policy covering the lives of more than one individual covered under the single policy. Individuals covered do not receive a policy but instead, receive certificates of insurance. The rate and coverage are based upon group underwriting, with all individuals covered for the same amount and rate

Permanent vs. Term

Regarding the length of coverage, all life insurance policies fall into 2 categories: temporary and permanent protection

The policyowner ____ have insurable interest in the life of the _______

must insured

A valid insurable interest may exist between the policy owner and the insured when the policy is insuring any of the following:

1. Policyowner's own life 2. The life of a family member (a spouse or a close blood relative) 3. The life of a business partner, key employee, or someone who has a financial obligation to the policyowner (such as debtor to a creditor)

what 2 basic approaches do insurance companies have to help producers and buyers to determine the needed amount of protection?

Human life value approach and needs approach

Individual life insurance

Written on a single life. The rate and coverage is based upon the underwriting of that individual

Policy summary

a written statement describing the features and elements of the policy being issued. It must include the name and address of the insurer, and the generic name of the basic policy and each rider. A policy summary will also include premium, cash value, dividend, surrender value and death benefit figures for specific policy years. The policy summary must be provided when the policy is delivered.

Solvency

ability to meet all financial obligations (e.g. an insurance company maintains enough assets to pay claim)

Executive bonuses

an arrangement where the employer offers to give the employee a wage increase in the amount of the premium on a new life insurance policy on the employee. The employee owns the policy and therefore has all control. Since the employer treated the premium payment as a bonus, that amount is tax deductible to the employer and income taxable to the employee. It is assumed that if the employee were not willing to accept these conditions, the employer would not provide the benefit.

Needs Aproach

based on the predicted needs of a family after the premature death of the insured. Some of the factors considered by the needs approach are income, the amount of debt (including mortgage), investments, and other ongoing expenses

Variable Life Insurance or Annuities

contracts in which the cash values accumulate based upon a specific portfolio of stocks without guarantees of performance. Variable annuities keep pace with inflation, and are determined by the value of securities backing it.

Life insurance

coverage on human lives

Estate correction

it's especially important for young families that are getting started and have not yet had time to accumulate assets. When an insured purchases a life insurance policy, he/she will have an estate of at least that amount the moment the first premium is paid. There is no other legal method by which an immediate estate can be created at such a small cost

Life insurance proceeds

may be used to pay inheritance taxes and federal estate taxes so that it is not necessary for the beneficiaries to sell off the assets

Education Funds

paying for children's education expenses so they can remain in school, or for a surviving spouse who may need additional education or training in order to re-enter the job market

Emergency reserve funds

paying for unexpected expenses following the death of the insured, such as travel expenses and lodging for family members

Debt Cancellation (as an alternative to Estate Liquidation)

paying off debts of the insured such as home mortgage, or auto loans. (Most lenders require a collateral assignment of life insurance as a condition for a loan)

Lump-sum

payment of the entire benefit in one sum

Illustrations

presentation or depiction of nonguaranteed elements of a life insurance policy

participating (mutual) life insurance policy

refers to any policy that distributes its dividends to policyowners by cash payments, reduced premiums, units of paid up insurance, a savings program, or by the purchase of term insurance.

The purpose of the Life Insurance Disclosure Model Regulation adopted by the National Association of Insurance Commissioners (NAIC)

requires insurers to deliver to purchasers of life insurance information that will improve their ability to select the most appropriate plan of life insurance for their needs and improve the buyer's understanding of the basic features of the policy that has been purchased or is under consideration

Liquidation

selling assets in order to raise capital

Costs associated with death (postmortem)

taking into account the final medical expenses of the insured, funeral expenses, and day-to-day expenses family maintenance

Term Life Insurance

temporary life insurance provided for a specific period of time. Also known as pure life insurance

Death benefit

the amount paid upon the death of the insured in a life insurance policy

Stock Purchase

used by privately owned corporations when each stockholder buys a policy on each of the others

Cross Purchase

used in partnerships when each partner buys a policy on the other

Stock Redemption

used when the corporation buys one policy on each shareholder

Liquidity

As a result of the cash accumulation feature, some life insurance policies provide liquidity to the policyowner. That means the policy's cash values can be borrowed against at any time and used for immediate needs

Cash Accumulation

Life insurance may be used to accumulate specific amounts of monies for specific needs with guarantees that the money will be available when needed.

life insurance

insurable interest must exist between the policyowner and the insured at the time of application; however, once a life insurance policy has been issued, the insurer must pay the policy benefit, whether or not an insurable interest exists.

Social security income "blackout" period

Social security blackout period is the time during which the surviving spouse and/or children do not receive any social security survivor benefits. Blackout periods begins when the youngest child reaches the age of 16, and ends when the surviving spouse qualifies for retirement benefits, as early as age 60. (Unmarried children under the age of 18 or up to 19 if they are attending secondary school full time can also receive benefits. Technically, the social security check will be made payable to the surviving spouse until the youngest is 16, and directly to the child in between the ages of 16 and 18.)

Survivorship protection

The death of the primary wage-earner will usually stop the flow of income to a family. The death of a nonearning spouse who cares for minor children can also cause great financial hardship for the survivors. Life insurance can provide the funds necessary for the survivors of the insured to be able to maintain their lifestyle in the event of the insured's death. Planning for survivor protection requires careful examination of current assets and liabilities as well as determining what survivors' needs may be

Fixed life insurance or annuities

contracts that offer guaranteed minimum or fixed benefits that are stated in the contract

Nonparticipating policy

does not pay dividends to the policyowner

Cash value

equity amount accumulated in permanent life insurance

Human Life Value Approach (HLVA)

gives the insured an estimate of what would be lost to the family in the event of the premature death of the insured. It calculates an individual's life value by looking at the insured's wages, inflation, the number of years to retirement, and the time value of money

In the event of death of a key employee

the business would use the money for the additional costs of running the business and replacing the employee. The business cannot take a tax deduction for the expense of the premium. However, if the employee dies, the benefits paid to the business are usually received tax free. No special agreements or contracts are needed except that the employee(s) would need to give permission for this coverage